The relentless fall in the yields on gilts have left the banks with no choice but to pare deposit rates. They have been resisting doing this in recent times despite the cuts in the bank rate and cash reserve ratio (CRR) announced in the October credit policy.
Union Bank of India took the lead today by cutting its deposit rates by between 50 and 25 basis points (one basis point is one hundredth of a per cent) across maturities. At the shorter end, it will now offer a 5.75 per cent interest rate (46 to 179 days), down from 6 per cent, while a one to two year deposit will attract 7.5 per cent interest (8 per cent) from December 1.
This is the first instance of any bank cutting deposit rates after the Reserve Bank of India announced its credit policy in October. Other banks are set to follow suit soon. "The 10-year paper yield is now below 8 per cent and five-year yield is below 7 per cent. It is just not possible to put money in government securities when the average cost of deposits is 7 per cent for most of the banks," said a bank chairman. Add to this the load on account of maintaining the CRR and the overhead cost and the cost of money for banks works out even higher.
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Most of the banks had two rounds of deposit rate cuts before the credit policy. But they have not pared their deposit or lending rates over the last six weeks even though prices of gilts are on the rise, pushing the yields to historic lows every day. The yield on the benchmark 10-year paper today dropped to 7.87 per cent despite the RBI attempt to stem the fall in yield through a massive open market operations auction.
Call rates have been hovering around 6.5 per cent which is also the benchmark bank rate and repo rate.
Senior bankers feel the RBI has been watching the scene closely and wants the bank to cut their deposit rates and lending rates subsequently, as otherwise the rally in the gilts market cannot be sustained. Most of the banks are offering an interest rate of between 5 per cent and 7 per cent for deposits of between 15 days and one year. The rates for deposits of over one year and three years range between 8 and 8.50 per cent.
"There could be a 50 basis points cut across the maturity spectrum as otherwise nobody can deploy funds in any profitable avenue," said another senior banker.
The main hurdles to cutting the deposit rates are the Reserve Bank of India's Relief Bonds and LIC's Bima Nivesh both of which offer a tax-free return of 8.5 per cent. "Both the instruments are attracting a huge flow of money. Besides, around Rs 25,000 crore have flowed into debt funds. A cut in deposit rates may affect the flow but the banks have very little choice as otherwise the bottomline will be hit, " said the treasury chief of a private sector bank.
Till November 2, the banking sector's deposit mobilisation was to the tune of Rs 89,986 crore, up from Rs 74,986 crore in the corresponding period in 2000-01. The aggregate lending to the commercial sector (including credit through debt paper) in the current financial year till November 2 was Rs 26,059 crore, down from Rs 36,656 crore during the comparable period in the last fiscal.
Naturally, the banks have been rushing to park funds in government securities. Till November 2, the incremental exposure of the industry to gilts stood at Rs 46,160 crore versus Rs 24,400 crore during the comparable period in 2000-01.